Federal Red Ink Continues to Engulf Housing Finance with No Cap in Sight by Pete the Banker

July 23, 2010

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by Pete the Banker
In a CBO report issued late last year estimated that the cost of the bailout of Fannie Mae and Freddie Mac would approach $390 Billion over the next decade.  Only a couple months ago we were told by industry analysts that the worst case basis for the GSE’s bailout might cost taxpayer’s $1 Trillion.
While the media has concentrated its attention on the GSE’s, Special Inspector General for the Troubled Asset Relief Program Neil Barofsky released his quarterly report on Wednesday indicating that total taxpayer support for the nation’s housing finance system including Fannie Mae, Freddie Mac and the Federal Housing Administration rose by $700 Billion in the past year alone to over $3.7 Trillion.  This estimate of Federal Government subsidy not only significantly dwarfs long term CBO estimates for taxpayer losses on the GSE’s, but also exceeds the $300B in funds returned by TARP over the past year.  This total includes a variety of Federal Reserve funding commitments, enhanced FDIC guarantees for a variety of bank assets and accounts, and over $500 Billion in increased mortgage loan guarantees issued by Fannie, Freddie and the FHA whose mortgage lending has accounted for over 80% of the overall residential mortgage loan production over the past two years. (here)
You will recall, Inspector General Barofsky made headlines last Fall when he was quite critical of the Treasury Department and Secretary Geithner in his report issued on the TARP bailout of AIG and payment of 100 cents on the dollar to AIG counterparties including Goldman Sachs and JP Morgan for nearly worthless Credit Default Swaps (here). 
Yesterday, Barofsky again leveled criticism at the Treasury Department specifically citing its failure through the Home Affordable Mortgage Program (HAMP) to put an “appreciable dent in foreclosure filings”. He criticized the Treasury’s laxity in providing transparency, accountability, and more significantly its ineffectiveness in pursing the housing rescue goals. To date the program has reached only 1.5 Million delinquent homeowners of the estimated 3 – 4 Million the Administration intended to help by 2012.  Of the 1.2 million homeowners that have become involved in the HAMP program, some 400,000 have advanced to the permanent loan modification, while some 520,000 have failed early in the modification process (here). Furthermore, even borrowers achieving permanent HAMP modifications have demonstrated re-default rates of between 41% and 54% within 9 months thereafter (here)! 
Despite the Administration’s recent focus on convincing the public that the TARP program is likely to cost the taxpayer little, the total cost of Federal Government intervention in the housing finance markets is growing astronomically and as yet its efforts have failed to stabilize the real estate capital markets.
As Darrell Issa Republican Congressman from California suggested, the Federal Government efforts in handling financial bail out is simply a case of “dumping good money after bad”.
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